ATO goes after holiday home rorts

People who suspect there are other taxpayers out there that are “not playing fair”, can confidentially report suspected tax evasion to the ATO.
Photo: Nicholas Watt

by
Nassim Khadem and Nick Lenaghan

The tax office is cracking down on holiday home owners who rort the tax system by claiming tax deductions for properties they pretend to rent out.

The tax office said it had written to more than 110,000 rental property owners and was “monitoring holiday home rentals closely" through official reviews and audits.

It is unclear how many of the 110,000 own holiday homes. The tax office is looking at all rental deductions that its electronic monitoring systems flag as suspicious.

A tax office spokeswoman said holiday home deductions were often being overclaimed.

Real estate agents say some property owners have granted them the legal authority to rent out their houses, but never approve tenants.

One Portsea agent, who did not wish to be named, acknowledged that some owners had given them an authority to rent “but every time you ring up to say you’ve found a tenant they say ‘no, I don’t want that tenant’. They actually want to keep it for themselves."

Owners are then able to show the “authority to rent" documents to their accountants as evidence they are trying to rent the house and blame the agent for not finding tenants.

The owner might claim ongoing costs and the need to keep their place properly maintained and ready for potential tenants.

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“Then the owners would have to come down and check that the work was being done properly of course," he said. “They might spend the weekend down there just check the grass had been cut and the windows washed. People get away with what they can get away with."

Bona fide efforts

The tax office last month issued a ruling signalling it would look at the period of time properties are available for rent and whether “active and bona fide efforts to let the property at a commercial rental were made during the relevant period".

A tax office spokeswoman said property may be advertised for rent but “that may not be sufficient to determine that what is received is income or that the expenses incurred are deductible".

“One example we have seen is where the property is only available during the off-peak holiday season when the rent is very low," she said.

“Other examples are a property in a very remote location . . . or a property that has draconian conditions attached to the rental. In these cases the expenses far exceed the income, if any, and need apportionment on other than a time basis."

She said the ruling made clear that the expenses claimed cannot exceed the income received.

“We have sophisticated risk detection models in place that enable us to identify and review taxpayers who have unusual rental income and deduction patterns when compared to taxpayers with properties in similar locations," she said.

The tax office is also working to educate holiday home owners about when they need to declare income. “In particular, we do see inaccuracies in deductions that can be made for holiday homes only rented out for short periods," she said.

A recent Tax Office audit found a person who lived in the holiday house at peak times with his family, made it available to friends throughout the year for a “token amount $50 a week", and had an agreement with a local real estate agent that the holiday house is available for limited periods when it was not being used by family or friends.

The taxpayer then declared all the rent he had received through the agent and holiday home ownership expenses for the full year. “The taxpayer was liable for tax on the rental loss [claimed] and a penalty," the spokeswoman said.

She said people who suspect there are other taxpayers out there that are “not playing fair", can confidentially report suspected tax evasion.

With rising house prices - especially on Portsea clifftops which can fetch $4 million or more - surging land tax might be another way to flush-out rorters. Holiday landlords simply cannot afford to keep houses empty and at their own disposal for most of the year, just to enjoy a few weekends and summer breaks, if they also need to service hefty land taxes and mortgages.

General manager of online holiday rental site Stayz (owned by Fairfax Media), Anton Stanish, said a recent survey of our homeowners found that 73 per cent rented their holiday home for more than 10 weeks during the last year, and over a quarter rented their holiday home for 30 weeks.